By Charles Lammam
and Milagros Palacios
The Fraser Institute
The difference between campaigning and governing is that the latter means making difficult decisions. The new Liberal government’s first budget shows that they are not yet prepared to make those trade-offs.
Much of the new budget shows an unwillingness to face difficult decision-making about how best to prioritize current spending.
The government of Prime Minister Justin Trudeau has largely failed to reform or cut low-priority spending or ineffective programs. Instead, it simply increased overall spending. Indeed, the new budget calls for a $20.5-billion increase in program spending this year, a 7.6 percent hike on top of marked increases in spending last year.
In addition, these spending increases are not being financed by higher taxes, which would at least better match the benefits of new spending with the costs. Rather, the government decided to incur more debt to finance spending. The Liberals propose running a $29.4-billion deficit this year, almost entirely driven by new higher spending.
One laudable aspect of the budget is the increase to the top-up provided to low-income seniors through the Guaranteed Income Supplement (GIS). The government proposes to increase the benefit by up to $947 annually to the most vulnerable seniors. That will cost about $670 million a year.
Few would disagree with the goal of protecting seniors from dire poverty, particularly those who don’t have employment opportunities or savings to draw from.
However, how the Liberals decided to finance this worthy reform reveals a flaw in their governing strategy. As we pointed out several years ago in a study evaluating the Old Age Security (OAS) program, substantial savings are available by better targeting OAS benefits. The newly enhanced GIS benefit could have been financed in its entirety by such improved targeting.
OAS benefits go to eligible Canadians over the age of 65 at a flat-rate of $570 per month. The key is the eligibility criteria. In 2015, seniors received full OAS benefits as long as their annual income was below $72,809. They received partial benefits if their individual income was between $72,809 and $118,055.
OAS benefits and the clawback reducing those benefits are calculated on individual income. For example, a couple could earn up to $145,618 and still receive full OAS benefits in 2015. Even couples with income up to $236,110 could receive partial OAS benefits.
It would be far better to only deliver OAS benefits to seniors in need. Lowering the threshold for full benefits would free up additional government resources. We recommended integrating the threshold for OAS eligibility with the threshold for the Canada Pension Plan (CPP) – roughly $53,600 in 2015. That would save about $1 billion a year.
Governing requires making difficult decisions and managing trade-offs. The Liberal government of 1993 to 2003, led by then-prime minister Jean Chretien, was masterful at setting spending priorities and living within its means.
The first budget of the Trudeau Liberals largely avoids the difficult decisions of setting priorities and living within their means. At some point, however, this government will have to make those tough decisions and may regret some of the policies enacted in this budget.
Charles Lammam is director of fiscal studies and Milagros Palacios is senior economist with the Fraser Institute.